HRL Holdings: Another ALS in the making?

As noted in a previous article one of the ways to discover new ideas for further research is to look at stocks hitting new 52 week lows or 52-week highs for that matter. One such stock hitting 52-week lows which has come my attention is HRL Holdings (HRL:AX).

The company operates primarily in the environmental services industry providing inspection and testing services. It primarily focuses on hazardous environmental services, (think things like asbestos) and geotechnical services in Australia and New Zealand.

While a microcap it shares a lot of similar attributes to ALS Limited (ALQ:AX) or global behemoths like Bureau Veritas SA (4BV:GR) and SGS (SGSN:VX) in terms of the products and services it provides to its customers. The industry is split between very large players (as mentioned above) and very small private players with no real mid-tier player. HRL is seeking to be that mid-tier player through an acquisition based rollup strategy and an organic rollout strategy of existing brands to new geographic locations.

The company operates in three interrelated market verticals with various brands

• Hazardous Material Sampling & Testing (Octief & Precise Consulting)
• Geotechincial Serives (Morrisons Geotechnic)
• Specialist Hazardous Monitoring Software (Octfolio)

The company is, in addition, looking to enter new testing verticals most likely through acquisition of testing companies or laboratories in the air, water and food industries. This in addition to expanding the number of testing services in their current business units. It has a strong focus cross-selling services and synergies between business units as new acquisitions are integrated into the group. A key example of this was the Octfolio acquisition where HRL was one its largest customers pre-acquisition. Thus, providing HRL with the opportunity to offer a more vertically integrated service to its clients and to cross-sell HRL’s other products and services to Octfolio database of clients.

The company achieved profitability in FY17 and while minimal it does mark key milestone for the business. Management has also indicated that corporate costs/head office costs are now largely in place and thus should not need to rise to any great degree as the business grows.

Acquisitions to become accretive in FY18

FY18 will see the full year contributions from the two most recent acquisitions of Morrison’s and Octfolio which should significantly boast revenues and improve profitability compared to FY17. This is before any other acquisitions that could be brought into the group in FY18 as part of HRL’s stated growth strategy. Some synergies and cost savings can also be expected to be realized from the two acquisitions, aiding FY18 margins. 

The company has announced some notable contract wins in recent months including a 3-year service agreement with the Queensland Department of Transport & Main Roads. A smaller 6-month services contract with the Northern Territory Department of Housing which will contribute to the FY18 results. The company has furthermore been given approved contractor status with South32.

Key risks

Obviously, there are risks one must be cognisant of in relation to HRL’s strategy.

The first is integration risk as all these acquisitions come with disparate systems and corporate cultures.  These acquisitions somehow have to be carefully integrated into the HRL setup in order to realize synergies and cost benefits and be accretive to HRL’s earnings.

The second key risk is the board and management’s ability to allocate capital effectively i.e. not pay too much for businesses and ensure their due diligence avoids bringing a problem child into the group through legacy issues from the acquisition. To date at least these two risks appear to have been satisfactorily managed by HRL.

The company currently has no geographic presence in the NSW or VIC markets and I would expect future acquisitions or organic expansion of existing brands into these geographic markets in order to give them a more national footprint in Australia. HRL currently has a very good presence in QLD and NZ. It also has a presence in the NT, ACT and WA. 

As previous a mentor of mine once said to me “the best time to own a business involved in a rollup strategy is the early days” Rollups can be very successful and very profitable to investors in the early days just pull up some charts of G8 Education Ltd (GEM:AX) or Greencross Ltd (GXL:AX) in the first few years of their rollup strategy to see why being in at the start can be very rewarding for shareholders.

HRL has reached the profitability milestone and to date have shown they can both allocate capital effectively and integrate acquisition into the group. The management and board own just over 40% of the business so they are very aligned with external shareholder to make the business work and execute on the stated strategy. HRL has a market capitalisation of circa $19mil, hitting 52 weeks lows despite improving business performance with an outlook for improved revenues and earnings in FY18. To me it’s interesting.